Housing Washington NMTC Workshop 9/13/2005 1 New Markets Tax Credits: Putting them to Work Presenters: Norm McLoughlin, Kitsap County Consolidated Housing Authority Michelle Morlan, National Development Council Dan Landes, Common Ground New Markets Tax Credits • Federal tax credit to spur private investment in low income communities • Investors get tax write down • Businesses and projects get equity or below market loans • Primarily for economic development but can be used on housing development projects New Markets Tax Credits • Investor gets 39% of their investment as tax credit over 7 years • A substantial portion of this investment reaches businesses or projects as equity or low interest loans 6% 6% 6% 6% 5% 5% 5% Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Pacific Plaza, Bremerton, WA • Commercial building located in downtown Bremerton • Rehab of 2 story building • 10,000 sq. ft. commercial space • Tenants include a dentist and a naval information services company • Developed by B.M., LLC • Tenants are also owners of the building
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Housing Washington NMTC Workshop 9/13/2005
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New Markets Tax Credits:Putting them to Work
Presenters:Norm McLoughlin, Kitsap County Consolidated
Housing AuthorityMichelle Morlan, National Development CouncilDan Landes, Common Ground
New Markets Tax Credits
• Federal tax credit to spur private investment in low income communities
• Investors get tax write down• Businesses and projects get equity or
below market loans• Primarily for economic
development but can be used on housing development projects
New Markets Tax Credits
• Investor gets 39% of their investment as tax credit over 7 years
• A substantial portion of this investment reaches businesses or projects as equity or low interest loans
• Commercial building located in downtown Bremerton
• Rehab of 2 story building
• 10,000 sq. ft. commercial space
• Tenants include a dentist and a naval information services company
• Developed by B.M., LLC• Tenants are also owners
of the building
Housing Washington NMTC Workshop 9/13/2005
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Pacific Plaza – Why NMTC?
• Two displaced commercial tenants needed new space– Dentist’s office– Naval intelligence
company• Both wanted to own their
own building, and were considered relocating outside of Bremerton
• NMTC loan enabled them to stay in Bremerton
• The dentist and naval intelligence company expect to create 10 new full time jobs by the end of 7 years
NMTC and Housing
• Mixed‐use projects with less than 80% of revenue from residential
• Mixed‐use projects, with separate commercial condo
• Homeless shelters• Economic development components
to larger residential projects (e.g., HOPE VI redevelopments)
• Homeownership deals
Albers Mill Lofts, Tacoma, WA
• Located on Thea Foss Waterway on former brownfield site
• Developed by Heritage Properties
• Rehab/new construction• 10,000 sq. ft. commercial
(art gallery and café)• 36 residential units
(market rate)• Utilized Historic Tax
Credits
Albers Mill Lofts – Why NMTC?
• Converting historic mill into residential lofts was expensive
• Difficult to find traditional investors interested in former Superfund site in Tacoma
• Projected rents left financing gap
Housing Washington NMTC Workshop 9/13/2005
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Compass Center, Seattle, WA
• Located in Pioneer Square
• Developed by Compass Center
• New construction component of new/rehab development
• Social service space• New offices for Compass
Center• 78 transitional housing
units for homeless men
Compass Center – Why NMTC?
• New construction portion was $9.4M
• Over 10 different funding sources
• Included $3.2M owner equity
• Cost increases at 75% completion created funding gap of $850k
LaSalle Hotel, Seattle, WA
• Located in Pike Place Market
• Developed by Pike Place Market Preservation & Development Authority
• Rehab/new construction• 36,500 sq. ft. commercial• New senior center• 64 residential units
LaSalle Hotel – Why NMTC?
• Total commercial development costs of $3.89M
• Raised $1.46M of grant money and $664K of equity
• Because of subsidized rent for senior center, new rents could afford only $900K of debt
• Left with $850K financing gap
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Morrier Hotel, Yakima, WA
• Located in downtown Yakima
• Developed by Morrier Hotel LLC
• Rehabilitation• 86‐unit hotel
with retail space• Utilized Section 108
loan from City of Yakima
Morrier Hotel – Why NMTC?
• Restoration of vacant department store to hotel use
• Combined Loan To Value requirements for hotel projects limited to 70%
• Project needed Section 108 loan and significant owner equity
• Remaining gap of $800k
NMTC Terms
• LIC: Low‐Income Communities• CDFI Fund: U.S. Treasury
Community Development Financial Institutions Fund
• CDE: Community Development Entity
• QEI: Qualified Equity Investment• QALICB: Qualified Active Low
Income Community Business• QLICI: Qualified Low Income
Community Investment
LIC• Low‐Income Communities• Eligible census tracts
– Poverty level above 20%, or– Median income below 80% of state or
metro median income, whichever is greater
– Census tracts with population less than 2,000 located in empowerment zones and contiguous to other eligible tracts
• Rural counties that lost > 10% of population between 1980 and 2000
• Targeted populations designated by Treasury Secretary
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CDFI Fund
• Allocates New Markets Tax Credits through national competition
• $15 billion appropriated for program
• $8 billion allocated in first 3 rounds• $3.5 billion available in round 4,
applications due September 21, 2005
CDE
• Community Development Entity• Certified by CDFI Fund• Eligible to apply for NMTC
allocation from CDFI Fund• Sells NMTC to investors• Must reinvest money from investors
in Low‐Income Communities
QEI
• Qualified Equity Investment• Amount of equity invested into
CDE by investor or investors• Basis for calculating tax credits: 39%
of QEI over 7 years• Equity cannot be a loan and cannot
be collateralized• Investment must remain in CDE for
7 years
QALICB
• Qualified Active Low Income Community Business
• Business (or project) must have substantial connection to Low Income Community, measured by percentage of gross income, tangible property and/or services
• Real estate deals in LIC qualify
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QALICB (continued)
• Ineligible business– Residential real estate (>80% of income
from residential)– Rental property w/o substantial rehab– Golf courses– Country clubs– Massage parlors– Hot tubs or tanning facilities– Gambling facilities– Farming businesses– Liquor stores– Rental to non‐qualified businesses
QLICI
• Qualified Low‐Income Community Investment
• Loan or equity investment by the CDE into QALICB
• CDE must invest substantially all (85%) of QEI in QLICI– Additional 5% may be kept in reserves
• CDE Fees: may be up to 15% of QEI, typically range from 3 – 6% of QEI
• QLICI = QEI – CDE holdbacks
CDE
Subsidiary CDE 2Subsidiary CDE 1
QLIC
I
QLIC
I
NMTC Program StructureCDFI Fund
QALICB 1 QALICB 2
Investor A Investor B
NM
TC
NMTCNMTC
NMTC NMTC
QEIQEI
NMTC Structure – Project LevelInvestor
Subsidiary CDE
QALICB (Project)
QLIC
I
(loan or equity)
Inte
rest
Pay
men
ts
QEI
Div
iden
ds
CDE Fees CDENMTC
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Leveraged Investment
• Investors receive New Markets Tax Credits on other people’s money– Conventional loans– Historic Tax Credits– Government loans– Philanthropic grants
• Loans used as leverage cannot be secured by real estate for 7 years
• Money flows through upper tier investment fund (typically LLC)
Equity
NMTC Structure – Leveraged Investment
Investment Fund LLC
Subsidiary CDE
QALICB (Project)
QLIC
I
Inte
rest
Pay
men
ts
Investor
NMTC
CDE Fees CDE
Dividends
Loan Payments
Loan
Willing Lenders
QEI
Div
iden
ds
More Terms
• A Loan – The portion of QLICI that investor expects to get back after 7 years
• B Loan– The portion of QLICI that is related to the net benefit of NMTC
• C Loan– The portion of QLICI related to leveraged sources. C Loan terms reflect terms of leveraged sources.
• Amount of Leverage– Without leverage, benefit limited to
interest savings– Benefit grows as leverage grows
• Investor IRR– Currently ranges from 7% to 12%
• Transaction Costs– CDE Fees: typically 3 – 6% of QEI– Reserves required by investor– Attorney fees for investor, CDE,
QALICB: can range from $25,000 to $150,000
– Annual asset management fees to CDE
Calculating the Benefit – Factors
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Calculating the Benefit
$0.30$0.31$0.3210%
$0.31$0.33$0.349%
$0.33$0.35$0.368%
$0.35$0.37$0.387%
@ 5% Fees@ 4% Fees@ 3% FeesIRRNet NMTC Benefit per $1.00 of LeverageInvestor
Note: These calculations do not take into account the cost of attorneys’ fees and required reserves.
NMTC Exit Strategy
• CDE dissolves after year 7• Non‐leverage deals
– Loan refinanced, investor repaid• Equity deals
– Put/call provision similar to Historic Tax Credits
• Leverage deals– A Loan refinanced– B Loan assigned to investment
partnership who can then forgive loan– C Loans assumed by leverage lenders